Decided on 12 July 2022 | Supreme Court of India
In Vidarbha Industries Power Ltd. vs Axis Bank Limited, the Supreme Court (“the Court”) observed that it is not mandatory for the Adjudicating Authority (“NCLT“) to admit an application to initiate Corporate Insolvency Resolution Process (“CIRP“) even if a debt existed and the Corporate Debtor (“CD“) is in default. The NCLT may in its discretion not admit the application of a Financial Creditor (“FC“). However, such discretionary power cannot be exercised arbitrarily or capriciously.
In this case, Axis Bank Limited (“ABL“), as FC of Vidarbha Industries Power Limited (“VIPL“), filed an application under Section 7 (2) of the Insolvency and Bankruptcy Code 2016 (“IBC“) before the NCLT, Mumbai for initiation of CIRP against VIPL. The principal outstanding amount due to ABL was Rs.499,22,85,110.65/-.
It was the case of VIPL that an amount of INR 1,730 Crores was realizable by VIPL in terms of an order passed by Appellate Tribunal for Electricity (“APTEL“) in its favour. However, this order has been appealed by the opponent party, which is pending before the Court.
Hence, VIPL filed an application to stay proceedings before NCLT till the appeal remained pending. NCLT dismissed the application and refused to stay initiation of CIRP against VIPL on the premises that an application must necessarily be entertained if ingredients of Section 7(5)(a) of IBC are satisfied i.e. if a debt existed and CD was in default of payment of debt. In other words, the NCLT found Section 7(5)(a) of IBC to be mandatory.
VIPL filed an appeal before the National Company Law Appellate Tribunal (“NCLAT“). NCLAT dismissed the appeal upholding the decision of NCLT. Aggrieved by the order, VIPL approached the Supreme Court.
On the question whether Section 7(5)(a) is a mandatory or a discretionary provision, the Court observed that the legislature in its wisdom used the word ‘may’ in Section 7(5)(a) of IBC in respect of an application for CIRP initiated by a FC against a CD but has used the expression ‘shall’ in the otherwise almost identical provision of Section 9(5) of IBC relating to the initiation of CIRP by an Operational Creditor (“OC“).
Further, the Court held:
The legislature intended Section 9(5)(a) of IBC to be mandatory and Section 7(5)(a) of IBC to be discretionary.
An application of an OC for initiation of CIRP under Section 9(2) of IBC is mandatorily required to be admitted if the application is complete in all respects and in compliance of the requisites of IBC and the rules and regulations thereunder, there is no payment of the unpaid operational debt, if notices for payment or the invoice has been delivered to the CD and no notice of dispute has been received by OC.
In the case of an application by FC who might even initiate proceedings in a representative capacity on behalf of all FCs, the NCLT might examine the expedience of initiation of CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of CD. NCLT may in its discretion not admit the application of a FC.
Even though Section 7(5)(a) of IBC may confer discretionary power on NCLT, such discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances warrant exercise of discretion in a particular manner, discretion would have to be exercised in that manner.
The Court clarified that, for example, when the admission is opposed on ground of existence of an award or a decree in favour of CD, and the awarded/decretal amount exceeds the amount of the debt. the NCLT would have to exercise its discretion under Section 7(5)(a) of IBC to keep the admission of the application of FC in abeyance, unless there is good reason not to do so. NCLT may, for example, admit the application of FC, notwithstanding any award or decree, if the award/decretal amount is incapable of realisation.
On the question of time bound initiation and completion of CIRP, the Court clarified that such question could only arise if companies were bankrupt or insolvent and not otherwise. The Court held that there is no fixed time limit within which an application under Section 7 of IBC has to be admitted.
The Court held that both NCLT and NCLAT erred in holding that once it was found that a debt existed, and corporate debtor was in default in payment of the debt there would be no option to NCLT but to admit the petition under Section 7 of IBC. The orders of NCLT and NCLAT dismissing the application for stay were set aside and it directed NCLT to reconsider the application of the Appellant for stay of further proceedings on merits in accordance with law. Therefore, it is now clarified that Section 7(5)(a) of IBC is discretionary and NCLT may in its discretion not admit the application of a financial creditor.